How To Play It: REIT ETFs

Just like it is with almost all other financial asset classes these days, one of the easiest and most cost effective ways to get access to real estate income trusts is to buy exchange-traded funds.

South of the border, there are several REIT ETFs to choose from, including offers from some of the biggest-name providers.

The biggest and most popular product in the group is Vanguard REIT ETF (VNQ/NYSE), which gives investors expsosure to over 100 U.S. property trusts.

Another well known fund is iShares Cohen & Steers Realty Majors Index fund (ICF/NYSE) consisting of roughly 30 holdings spread out across all major REIT segments, while PowerShares Active U.S. Real Estate Fund is the only actively managed product in the space.

Here in Canada, the choice is decidely more limited. iShares S&P/TSX capped REIT ETF (XRE/TSX) is one of two all-Canadian funds.

Established in 2002, it has $1.35-billion in assets under management and holds the 13 largest REITS in the country. RioCan REIT, which owns shopping malls, is by far the largest holding in the fund with a 25% weighting, followed by H&R REIT, a mixed-use commercial property owner at 13%.

For more balanced exposure, the BMO Equal Weight REITs Index ETF (ZRE) has exposure to 20 funds with allocations to each name ranging between 6.04% and 4.95%. In addition to all of the 13 large caps holding of XRE, the BMO fund includes smaller cap names like Crombie REIT and Morguard Corp.

Both ETFs have management fees of 0.55% and have performed well over the past few years. XRE has a three-year return of 31% while ZRE has gained 20% since inception in May 2010.

According to most analysts, Canadian REITs are poised for more dougle digit gains over the next twelve months.

“We believe the Canadian REITs are well-positioned to deliver total returns (yield plus capital appreciation) in the 10-15% range in 2012 versus 21.7% in 2011,” said Mark Rothschild, an analyst at Canaccord Genuity.